okay so let's first of all talk about the the production possibilities frontier or the ppf and some other resources might call this the ppc the production possibilities curve either way it means the same thing but as i said it does allow us to illustrate some of the important notions we've described already such as scarcity trade-offs and opportunity costs so that in itself is useful but the ppf is useful for a whole series of other reasons as well um it allows us to illustrate the importance of resources and technology for economic growth it will illustrate how having more resources can be depicted as leading to more growth through a ppf and how technology changes also change the availability of the goods that we've got access to so what is a ppf so it says the ppf shows the various combinations of two goods and or services which can be produced given the available resources now even though we talk about combinations of two things the concept generalizes to as many things as you want to our focus here is about two things because that's easy to represent diagrammatically and we could still get across the same concepts and principles we want to explain with a two dog with a too good framework compared to a a frame which has got many goods so don't be too concerned about only two goods it's clearly an abstraction of reality but still gets across the key principles that we're trying to explain with a ppf now the thing is that um when it illustrates the various combinations of two goods that means that for two goods you could have different combinations and by definition as you produce more one good you'll produce less of the other good and therefore the combinations differ and therefore that explicitly illustrates the trade-offs involved between those two goods and therefore further illustrates the concept of scarcity the notion that you have got limited resources and therefore you can't produce both goods in infinite amounts there's a finite available set of resources and they have to be used in some sense to produce different combinations of the two goods and in a sense it's up to us to try to work out which of those combinations might serve us best to be more specific the ppf curve depicts the best combinations of those goods when the available resources are used efficiently so it's not just any combinations but the best ones we could do given our resources and their efficient use and that's why it's actually called a frontier a frontier means that in a sense we're at the extreme edge of the of the production space in a sense we're doing the best we can and that's the best situation we could arrive at now transpires and we'll illustrate this later that if you're inside the ppf then you're not using all your available resources and actually you can improve upon those positions now all this will probably make much more sense when we talk about an example so let's consider an example and as i said it relates to two goods and we've just chosen arbitrarily iron ore and coal it turns out that those two goods are the things that australia exports the most and hence i've used those as examples all these numbers are fictitious but it still will get across the the issues that we want to talk about now over here we've got data which relates to the different combinations of those two goods that potentially we could produce so point a it says we produce a hundred units of iron ore but no coal point b 90 units of iron ore and 10 units of coal etc and those points effectively relate to these points in this diagram so we've got point a b c d and e and they relate to that information in that table you can see the numbers accordingly now what's pretty clear i think from those numbers is that there's a trade-off as you produce more of one thing by definition you have to produce less of the other thing because you've got limited available resources and you can consider some particular points so in the extreme case if an economy devoted all its resources to producing iron ore only it will produce a hundred of those and no coal in contrast if it used all its resources only to produce coal then it'll produce 50 units of coal and no iron and all and in between at points b c and d there are different combinations of those two products iron ore and coal you can see just from the numbers that as i said as i nor goes down as we move from a to e i naught falls coal increases therefore that shows you this trade-off between those two things so in a sense that's a useful description of the trade-off that comes about which require which requires consideration given the concept of scarcity and the fact that we need to choose among those particular outputs now we could also talk about some other points in the diagram now point f is a point which is outside the ppf and that's unattainable in other words it's saying that no matter what you do with your resources your land labor and capital you can't get to a point such as point f it's beyond in the sense of physical limits of the production processes and that applies to any point outside to the right of this um ppf curve they're all unattainable although all what we call infeasible in contrast if you're inside that curve like a point g that means you're not using all your resources so you're not using all your available resources such as land capital and labor and you could have actually used more to produce more of the two goods and that's easily seen by comparing point g to say point b and point c and it transpires that in a sense you could be anywhere between point b and c and produce more of both goods than point g so g is clearly not a good place to be at you're not using all your resources you can actually use more of your resources to produce more of both goods iron ore and coal now the other distinguishing feature of this production possibilities frontier is the fact that we've got a non-linear curve here it's a bowed relationship or it's what we call concave to the origin looks like a cave from the zero point and in part the reason why that's concave is because of the notion of increasing opportunity costs and put simply what that really is saying is that as we produce more and more of something we tend to use resources which might be better used elsewhere and therefore the cost of producing more and more of something increases as a consequence it's like saying that we're using too much of something to produce something which is not well well suited for that production process so for example i mean as we move down this curve going from a to b to c to d to e we're starting to produce much more and more coal where it could transpire that some of those resources land labor and capital might have been better used for producing iron ore instead of coal and that's why we've got this so-called shape and that's why also we refer to that as increasing opportunity costs let's elaborate upon that let's sort of explain how that works in in numbers so here's the figure from the previous slide so this is the raw data there are points a through 2e there's our corresponding iron ore and coal figures now down the bottom here we're depicting what happens as we move between the points so from a to b to b to c etc and in these columns we talk about how iron ore and coal change as we move between those two points so for example as you move from point a to b we go from a hundred iron ore to 90 iron ore and therefore iron ore has fallen by -10 so we've got a minus 10 there and as we move from a to b we go from 0 to 10 for coal so coal is increased by 10. now what this is saying is that the movement from a to b means that to produce 10 units more of coal we have to give up 10 units of iron ore and in the last column you can convert that giving up bit that the notion of trade-off to a per unit concept we call it marginal because it actually does relate to a change from a to b so it's called the marginal per unit opportunity cost of coal in terms of iron ore and the way we work out this so called marginal per unit cost is by simply taking the ratio of the two numbers so it's 10 divided by 10 which means one so in a per unit sense it's saying that the opportunity cost of producing one additional coal unit will be giving up one iron ore unit and that makes sense here because in a sense we're giving up ten to produce ten so in terms of units to get one you need to give up one and that's where that number comes from and that's the so-called opportunity cost of coal as measured in inaudible and don't forget recall the concept of opportunity cost was what we forgo or what we give up um based upon the next next best alternative so in this case we're saying the next best alternative to producing coal is iron ore as another example let's consider the movement from b to c as we move from b to c we give up 30 additional units of iron ore and in return get 20 units of coal so to in other words to produce 20 units of coal we have to give up 30 units of vinyl when we take the ratio that means in a per unit sense the marginal opportunity cost of coal is 1.5 in other words we have to give up 1.5 units of iron ore to produce one additional unit of coal and when we continue on down this table to produce the values for the other movements you could see that these numbers these marginal peen and opportunity costs actually go up so as we go closer and closer to e it's costing us more to produce each traditional unit of coal in terms of iron ore and that gets back to that notion i described before where as you use more and more resources to produce a particular thing some of those research resources might have been better used in producing something else and that's why it's more costly produce a thing of focus and so that's as that is actually depicted in these numbers here 1 1.524 that illustrates this concept of increasing marginal opportunity cost [Music] and that's an important concept and in part that explains why that curve has got a shape which is non-linear right so it's got that shape because of this notion of increasing marginal opportunity costs if in contrast that was a straight line then those opportunity costs will be the same right throughout in a sense the slope wouldn't change but it's more realistic to assume increasing opportunity costs because of this notion that you're devoting resources away potentially from their best use as you produce more and more of something okay and i've sort of summarized all those things in words here so as i say as we move from the exclusive production of iron ore at point a and increase the production of coal towards point e increasing marginal opportunity costs for coal are evident and let's say as we start to increase the production of coal more iron ore has to be given up to produce each unit of coal as we approach e so in a sense the further we get to producing only coal the more iron ore we have to give up to get to that point and as we said increasing opportunity costs illustrate the notion that fewer economically efficient resources are available for the production of a particular good as more of that good is produced and that gets across this notion of increasing opportunity costs and the like so in in a way by talking about the ppf we've been able to talk about the trade-offs so how we have to trade off coal for our iron ore and vice versa and that's illustrated through this concept of opportunity cost now the same goes the other way too so with this figure here we actually worked out the other thing the marginal per unit opportunity cost for iron ore in terms of coal and sort of reverse all those numbers essentially so the principle applies in both directions we've just shown it for coal in this particular example but does illustrate all those important notions of scarcity opportunity cost and the notion of trade-off between two goods now we can use that ppf in a series of other ways to talk about other things such as economic growth now transpires that if all of a sudden we got more resources we had more land more labor more machinery then that leads to a shifting out of the ppf in this fashion as indicated by the red arrows so that means that for high levels of resources we can produce more of both goods and that's typical what of what happens with economic growth i mean traditionally i mean land might be reasonably fixed in the sense that you know there's no extra land we particularly can use in in the world unless we do some further exploration etc but the main resources which you can tap in to for economic growth typically are labor and producing more plant and equipment but in a general sense though having more resources allows us to shift out um the ppf to produce more of both goods iron ore as well as coal now in some cases um we could see how technology could be depicted through ppf and here's an example where let's assume that there are improvements in technology in producing coal and not iron ore so in a sense iron ore doesn't change in terms of technological improvements if that's the case then the curve pivots in this fashion this implies that through technological advances for coal we could actually produce more coal but we don't actually change our abilities to produce more iron because iron ore because there's been no improvements technology so in this case the actual curve pivots and it'd be the opposite if there's no improvements in technology for coal but there were an iron ore the pivot would be in the other direction on the other hand if there are improvements in both producing coal and iron ore it will be like the previous diagram where the entire curve shifts out so you could actually use the ppf in quite a few ways illustrating higher numbers of resources as well as improvements in technology okay so clearly i think the ppf is quite important in economics it shows you the the important notion of scarcity trade-offs opportunity costs changing resources and technology changes so it's a very powerful tool which is um useful to bring to um your your knowledge at the outset in econ because it does illustrate the importance of a few important key principles